allowance for doubtful accounts

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Allowance for Doubtful Accounts

Extra funds from sales, or another source, set aside in order to pay off bad debt if and when it arises. The allowance helps a company ward off any potential cash flow problems should its credit sales not be repaid as expected. On financial statements, it is important to note that an allowance for bad debts exists for fiscal conservatism and not because one expects a large amount of bad debt to accumulate. An allowance for doubtful accounts is also called a cushion. Banks call these funds the loan loss reserve. See also: Savings account.

allowance for doubtful accounts

A balance-sheet account established to offset expected bad debts. If a firm has made a sufficient provision in its allowance for doubtful accounts, reported earnings will not be penalized by bad debts when the bad debts occur. If uncollectible accounts are larger than expected, however, the firm will have to increase the size of the account and reduce reported income. Also called allowance for bad debts, reserve for bad debts.

The firm, who sell household goods under names such as the Cotswold Company, Kitbag and Ace, said they were adding pounds 5million to their bad debt provision for the year until March 31, with profits hit as a result.

According to Lancaster, this was due to a one-time pretax bad debt provision of about $5 million, which covered the exposure from a bankruptcy filing of a major distributor of the company's specialty food products to the food-service industry.

The Terex Construction segment incurred charges in the quarter related to physical inventory results at four locations of approximately $4 million, additional inventory valuation charges of approximately $6 million, and an increased bad debt provision largely related to customers of the compact construction business of approximately $4 million.

The decline in result of 2011 versus the previous year 2010 was mainly due to the company selling on credit and arose mainly due to a change in the bad debt provision calculation methodology based on the Saudi Arabian Monetary Agency (SAMA) instruction number 201007/5/ dated 7/8/1431H and which resulted in the bad debt provision increasing by SR 12 million during 2011, and motor claims provision increase as result of the new royal decree on blood money," the insurance company explained.

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